Inflation has affected most parts of the world recently, so as an investor, it can be difficult to know whether inflation will positively or negatively impact your portfolio. Regardless of your situation, it is important to have an armoury of investment strategies to help you combat inflation’s effects.
Whether it is a bullish or bearish market, your overriding goal is always to preserve the value of your investments over the long term. Here, we will explore five investment strategies that may help you protect your investments during a time of ongoing inflation.
1. Diversify your portfolio
One strategy investors may choose to employ to help manage the effects of inflation is diversifying their portfolio. Because inflation typically leads to market volatility, some investors may shift their focus to debt instruments such as long-duration funds, which invest in long-term fixed-income securities with an average maturity period of more than seven years. However, long-duration funds are vulnerable to losses due to interest rate hikes.
Another strategy is to diversify internationally, as emerging markets are often exporters of commodities in demand – which can be a hedge against inflation. Since they are also not closely linked to the domestic economy, they may protect against deflation.
Regardless of what is happening in the economy at any given time, having a diversified portfolio, including investments suitable for both inflationary and deflationary periods, can offer the best protection.
2. Explore real estate
Real estate has traditionally performed well during periods of significant inflation, with the value of properties often increasing. However, past performance is not an indicator of future success, and in Australia, we are seeing property prices soften in most parts of the country.
Investing in real estate has several potential benefits, including its intrinsic value and income potential through rent. It also acts as a good inflation hedge since the demand for real estate remains even in uncertain economic times. Some popular ASX real estate stocks include:
- Mirvac Group (MGR.ASX)
- Stockland (SGP.ASX)
- Scentre Group (SCH.ASX)
- Goodman Group (GMG.ASX)
However, real estate is an illiquid asset, so an alternative is to invest in real estate investment trusts (REITs). REITs offer greater liquidity as they can be easily traded in the markets. Most REITs own and operate various properties, including commercial, residential and industrial, and generate income through rent and leases. They typically offer higher yields than bonds, and their prices are less likely to be affected by rising interest rates since their operating costs remain relatively consistent.
3. Look for companies that benefit from periods of high inflation
Inflation can have a significant impact on most equity sectors; however, there are a few industries that are more resistant to inflationary pressures and may even outperform rising inflation expectations. These “semi-immune” sectors are those with constant demand, such as healthcare and energy. Other sectors that may benefit from an inflation hedge, such as gold and precious metals, have also done well during previous inflationary periods.
Elsewhere, high-end engineering and mining companies tend to perform well despite inflation, as they are often involved in the production of commodities that increase in value during these periods. Telecommunication providers are also seen as a relatively inflation-resistant sector, as internet and phone services have become essential. Education is another essential service that is generally unaffected by inflation fears.
If you are interested in getting exposure to these industries, consider exploring the potential of sector ETFs or low-cost passive portfolios that target specific themes. Depending on your risk tolerance and long-term investment strategy, these vehicles can provide you with greater diversification across various companies within a particular sector.
4. Consider commodities
Some investors turn to tangible assets when inflation rises, as they tend to increase in value. Commodities, in particular, are often viewed as a hedge against the rising cost of living. When the economy expands, consumers and corporations generally have greater financial resources, resulting in increased spending. This often leads to supplies being squeezed and companies charging more for their goods and services, including raw materials and commodities. For example, when oil prices rise, the cost of petrol and diesel follows suit.
But investing in commodities can be highly volatile and may not be suitable if you are risk-averse. If you are approaching commodities for the first time, be aware of two major trends that are transforming this asset class. First, digitalisation is bringing more transparency to an industry that was previously opaque, which has levelled the playing field and is challenging the traditional competitive advantage of big commodities players. Also, the shift from fossil fuels to renewable energy is causing a huge shift in the commodities landscape – beyond just the energy sector. The path towards net-zero emissions is transforming the commodities market and creating new opportunities for investors.
5. Rebalance your portfolio as needed
In high-inflation environments, even stock-only portfolios require rebalancing. In order to reduce risk, you may want to limit your investments into overpriced technology and mega-cap growth stocks. Instead, there could be opportunities to shift those investments to more value-oriented and small-cap stocks.
Rebalancing can be beneficial because it reduces the risk of panicking during a market downturn and allows you to adhere to your long-term investment strategy. Make sure you look into rebalancing your portfolio at least once a year and more frequently during periods of significant market movement.
Investing during times of inflation can seem daunting, but with the right strategies, it can also present opportunities. By doing your due diligence and having a solid understanding of the market, you may weather the storms of inflation.
This communication is general information and education purposes only and should not be taken as financial product advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial product. It has been prepared without taking your objectives, financial situation or needs into account. Any references to past performance and future indications are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.